Module 2 ACC549

ACC 549
Saint Leo University
This study source was downloaded by 100000831265765 from CourseHero.com on 01-21-2024 11:33:30 GMT -06:00
https://www.coursehero.com/file/34514641/Module-2-ACC549docx/
Case 3-1:
A balance sheet shows a company’s assets, liabilities and the owner’s equity as of a
particular date. Many times these companies own another business or a portion of another
business, called a subsidiary, so they need a way to account for all of them by displaying the
financial information in one document. A consolidated balance sheet shows the assets, liabilities
and the owner’s equity of, not only the parent company, but also any subsidiary that they own
and does not distinguish between the parent and subsidiary.
Consolidated financial statements are required when the parent company owns a controlling
stake in the subsidiary. This may not necessarily mean that they own 100% of the subsidiary,
only that they own a majority or a controllable interest. Their notes to consolidated financial
statements note 1 even states that “the consolidated financial statements include the accounts of
Kellogg Company and its majority-owned subsidiaries” (Gibson, 2013, p. 140). Kellogg may not
own 100% ownership of the subsidiaries but should own a majority or a controllable interest in
them.
Since the consolidated balance sheet lists its accounts receivable net of allowance for
doubtful accounts, we are unable to determine the gross receivables. Their allowance for
doubtful accounts is an estimate by management of the accounts they believe will result in bad
debt from uncollectible accounts. The amount of Kellogg’s receivables at year end 2010 is
$1190 million. It should be noted that this is net of any allowance they have booked for accounts
they believe are uncollectable.
The total amount of inventory at the end of 2010 is $1056 million. They calculate
inventory at the lower of cost or market with cost being determined on an average costs basis.
Since they value their inventory at a lower of cost or market, it shows that they are being
conservative by not overstating their assets. They are taking the lower number for the asset
amount. This indicates that they are using a conservative basis. Just based on the two years
presented, the trend in inventory balances are increasing. So they are increasing their acquisition
of inventory or the market or cost is increasing.
The net property and equipment at the end of 2010 is $3128 million. Kellogg uses the
straight line method for financial reporting and accelerated method for those assets it is permitted
for. The depreciation method allowed by the IRS is the Modified Accelerated Cost Recovery
System (MACRS). Generally accepted accounting principles allows for certain types of
deprecation while the IRS allows for an accelerated depreciation. The company will want to use
the financial type that best suits their needs. There should be no accumulated depreciation on
land. Land is not depreciable because it is assumed that it has an unlimited useful life so
therefore you would not use up its life.
Treasury stock represents the amount of stock that the company has repurchased from the
market, but has not retired. It lowers the amount of outstanding stock, so it lowers the amount
in stockholder’s equity. The company can account for the treasury stock in two ways. The
first is the par-value method. Under this method, the company assumes that the relationship
with the original owner has ended and the stock is being retired (Schroeder, et al., 2014, p.
536-537). The company would recognize a paid in capital gain or loss on the date the share
are reacquired for the amount paid above or below par. The shares are booked to treasury
stock at the par value. If the shares are then sold at an amount above or below par, they
would book an additional entry for that amount to paid-in capital. The cost method makes the
assumption that the company will resell the shares at a later date. Under this method, the gain
or loss is not recognized until they are resold. They are booked to treasury stock at their cost
and when they company sells them, they would remove the cost from the treasury stock
account and the gain or loss would hit additional paid in capital up to the amount in the paid
in capital account. If the loss is more, you would hit retained earnings for the additional.
Kellogg Company uses the cost method to book their treasury stock.
Kellogg’s fiscal year ends on the Saturday that falls the closest to December 31st. Because
of this year end the date will be different every year so to account for this “a 53rd week is
added approximately every sixth year” (Gibson, 2013, p. 140). For example, Kellogg noted
that their fiscal year ending for 2009 fell on January 2, 2010 and their fiscal year for 2010 fell
on January 1, 2011. This variance will occur every year because they don’t have a set date
used to close their books.
In addition, like many companies they must utilize estimates in order to book certain
numbers. Since these numbers are based on estimates, the actual numbers may differ and
may be caused outside the control of management. The company management should always
use conservatism when booking these estimates. They also are conservative when reporting
cash and cash equivalents. They list any investments with maturities fewer than 3 months as
highly liquid. This is a relatively short period of time to have the investments converted to
cash, so they would fall under conservative.
Goodwill normally arises when a company purchases another for a value more than the
total value of the assets and liabilities. The company currently has $3628 million in goodwill
for fiscal year 2010, which is down from 2009’s goodwill of $3643 million. They test the
goodwill and indefinite-lived intangibles yearly for impairment. The test for goodwill
impairment includes the estimated fair value of the reporting units based on market multiples
from comparable companies and discounted cash flows (Gibson, 2013, p. 141). This fair
value is then compared with its carrying value. An impairment exists if the carrying value
exceeds the fair value. Their impairment test for other intangible assets is similar in that they
compare the fair value of the asset based on discounted cash flow of the asset to the carrying
value. They had some impairment in goodwill since the amount is lower in 2010.
The basic definition of an asset is something that will produce future economic benefits.
Research and development may be unreliable so there is no way to quantify the future
benefits. This is why these costs are expensed as incurred. As for the benefit recognition
model, the company uses this because it is required by the Financial Accounting Standards
Board (FASB) in their financial accounting series interpretation no. 48. According to FASB
(2006), “a benefit recognition model with a two-step approach, a more-likely-than-not
recognition criterion, and a measurement attribute that measures the position as the largest
amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon
ultimate settlement, will be adopted” (para. 6). This statement also allows the interest to
either be booked as interest expense or income taxes.
Case 3-3:
Statements are consolidated when the parent and any wholly or majority-owned
subsidiaries are included together in one statement. Abbott’s consolidated balance sheet will
contain the assets, liabilities and owner’s equity for Abbott Laboratories and any company that
they may own as if they were a single reporting entity.
For Abbott’s balance sheet ending December 31, 2010, the obligation in connection with
conclusion of the TAP Pharmaceutical Products Inc. joint venture seems to have decreased the
most from 2008 until 2010. In 2008, the amount was $915,982,000, which decreased to
$36,105,000 in 2009 and zero in 2010. The short-term borrowings decreased the most from 2009
to 2010 but for the three years, the joint venture had the most significant decrease. On the other
hand, the short-term borrowings had the most significant increase from 2008 until 2010 from
$1,691,069,000 to $4,349,796,000. The largest jump from 2009 to 2010 occurred in the other
accrued liabilities.
Abbott has Preferred stock, common stock and treasury stock. As of December 31, 2010,
they have issued 1,612,683,987 in common stock shares. Of this, 7,005,889 were issued in 2010.
Treasury stock are shares that the company has purchased back from the market. As of the close
of the statement date, Abbott had purchased back 72,705,928. The company accounts for these at
cost. This means that they book the repurchase at the amount they paid for the shares. When they
resell them, they will back out the cost and key the gain or loss for the difference to par value in
additional paid in capital. If the loss is more than the amount available in additional paid in
capital, they would hit retained earnings. At the end of 2010, Abbott still had 1,546,983,948
outstanding. They had 1,619,689,876 that were issued and 72,705,928 that they had repurchased
and are held in treasury stock. According to AccountingTools (2017), “the treasury stock method
is used to calculate the net increase in shares outstanding if in-the-money options and warrants
were to be exercised” and is “included in the calculation of diluted earnings per share” (Para. 1).
Although Abbot uses the term “Earnings employed in the business”, this simply means retained
earnings.
References:
AccountingTools. (2017 August 21). Accounting CPR courses & books. Treasury stock method.
Retrieved from https://www.accountingtools.com/articles/treasury-stock-method.html
Financial Accounting Standards Board. (2006 June). Project updates. Uncertain tax positions
(recognition of tax benefits). Retrieved from
https://www.fasb.org/project/uncertain_tax_positions.shtml
Financial Accounting Standards Board. (2015 February). Accounting Standards Update No.
2015-02: Consolidation (Topic 810). Retrieved from
https://asc.fasb.org/imageRoot/92/63493892.pdf
Gibson, C. (2013). Financial reporting & analysis. Thompson One Access Card. (13th ed.).
Mason, OH: South-Western Cengage Custom
Powered by TCPDF (www.tcpdf.org)

Module 2 ACC549

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Module 2 ACC549

Uploaded by

Copyright:

Available Formats

ACC 549

Saint Leo University

You might also like